Senate report: Phone bill cramming costs billions

Third-party charges on U.S. consumer and business telephone bills, most of them unauthorized by the customer, amount to US $2 billion a year, according to a new report from a U.S. Senate committee.

Unauthorized third-party charges on telephone bills, often called cramming, cost one national retail chain $550,000 over the last decade, not including the $400,000 the company spent to fight the mystery charges, said the report, resulting from a year-long investigation by the Senate Commerce, Science and Transportation Committee.

Telephone carriers have made more than $1 billion[b] in revenue from third-party charges in the past decade, said Senator John "Jay" Rockefeller, a West Virginia Democrat and committee chairman. Carriers get a fee for placing third-party charges on bills, according to the report.

In the late 1990s, after congressional hearings on cramming, carriers promised to fix the problem, Rockefeller said during a committee hearing Wednesday. "Congress took their word for it," he said. "But what we now know is that the cramming problem wasn't solved. Far from it."

Rockefeller ripped into telephone companies and trade group the United States Telecom Association for not taking stronger action against crammers. "Why not ban it?" he said. "Why put people through that? It doesn't make any sense."

Telephone carriers will work with Congress to fix the problem, said Walter McCormick Jr., president and CEO of the trade group. He said he couldn't answer Rockfeller's questions about why carriers permit unauthorized third-party billing, but he said it's difficult for carriers to determine which third-party charges are legitimate.

Revenues from allowing third-party billing amounts to about one tenth of 1 percent of carrier revenue, McCormick said. He promised to ask carriers about banning all third-party billing after a grilling from Rockefeller.

Congress originally required carriers to allow third-party charges as a way to allow customers to see their local and long-distance phone charges on the same bill, if they were provided by different carriers, McCormick said. Many carriers refund third-party charges after the first complaint by a customer, and many offer services to block all third-party charges, he said.

Rockefeller called on Congress to take action. Representatives of the attorneys general offices in Illinois and Vermont asked the committee to pass legislation that would ban most third-party charges on telephone bills.

Cramming happens when businesses add charges to a customer's phone bill without permission. In some cases, the crammers get the telephone number when a customer signs up for a free offer online, but in other cases, the crammers apparently pull telephone numbers at random, witnesses said.

Only about 1 percent of third-party charges on telephone bills are legitimate, said David Spofford, CEO of Xigo, a vendor that monitors telephone charges for other companies.

Cramming charges can be for as little as $1.99 a month, but Illinois investigators have found charges of up to $50 a month, said Lisa Madigan, the attorney general there. The charges are sometimes described as website design and hosting, search engine optimization and online yellow pages listings.

Corporate victims of cramming in recent years include Hewlett-Packard, IBM, AT&T, Dell, State Farm, Citigroup, American Airlines, Pepsi, Wal-Mart and Best Buy, according to the committee report. Large businesses with multiple locations are particularly susceptible to cramming, because of confusion over whether the charges were authorized, the report said. The report lists more than 200 business that have been victims of cramming, as well as several nonprofits, schools, and government agencies.

Susan Eppley, who worked in Georgia as accounts payable manager for a company operating fast food restaurants, said she discovered $4,200 in cramming charges in late 2010. She spent about 15 hours working to get the money back, she told the committee.

"It is infuriating to me that it is legal for companies to, without authorization, charge your businesses ... and, in effect, take money out of the hands of hard-working, deserving men and women," she said.

Wednesday's hearing focused on landline phones, but witnesses said the problem was growing for mobile users as well. It may be tougher to target on mobile services, because of a number of legitimate add-on charges, including ring tones, witnesses said.

The hearing came a day after the U.S. Federal Communications Commission proposed new rules that would require landline telephone carriers to notify customers at the point of sale and on each bill of the option to block third-party charges on their phone bills. The proposed rules would require both landline and mobile carriers to include notices on their phone bills and websites saying customers can file complaints about mystery fees with the FCC.

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is grant_gross@idg.com.

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